[Federal Register Volume 63, Number 128 (Monday, July 6, 1998)]
[Notices]
[Pages 36467-36468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17717]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40132; File No. SR-OCC-97-02]


Self-Regulatory Organizations; the Options Clearing Corporation; 
Order Granting Approval of a Proposed Rule Change Regarding the 
Issuance, Clearance, and Settlement of Options on Unit Investment Trust 
Interests and Investment Company Shares That Hold Portfolios or Baskets 
of Common Stock

June 25, 1998.
    On February 21, 1997, The Options Clearing Corporation (``OCC'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change (File No. SR-OCC-97-02) pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ On 
February 21, 1997, May 14, 1997, and June 11, 1998, OCC amended the 
proposed rule change. Notice of the proposal was published in the 
Federal Register on June 9, 1997.\2\ No comment letters were received. 
For the reasons discussed below, the Commission is approving the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 38706 (June 2, 1997), 62 
FR 31468.
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I. Description

    The rule change amends OCC's existing by-laws and rules to 
accommodate the issuance, clearance, and settlement of options on 
exchange listed securities representing units of beneficial interests 
in open-end unit investment trusts (``trust units'') and in open-end 
management investment companies (``fund shares'') that hold securities 
based on an index or a portfolio of common stocks, such as shares that 
have been proposed for trading by the American Stock Exchange 
(``Amex'').\3\ The Amex currently trades trust units know as Portfolio 
Depository Receipts (``SPDRs'') based on the Standard & Poor's 
(``S&P'') 500 index and on the S&P MidCap 400 index. SPDRs are trust 
units that represent beneficial ownership in the SPDR trust \4\

[[Page 36468]]

and trade similarly to shares of common stock.
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    \3\ Securities Exchange Act Release No. 38308 (February 19, 
1997), 62 FR 8467 [File No. SR-Amex-96-44]. The Chicago Board 
Options Exchange has filed a proposed rule change to trade similar 
products. Securities Exchange Act Release No. 38342 (February 26, 
1997), 62 FR 10098 [File No. SR-CBOE-97-03].
    \4\ The SPDR trust was established to accumulate and hold a 
portfolio of common stocks that is intended to track the price 
performance and dividend yield of a particular S&P index.
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    The Amex also trades fund shares known as World Equity Benchmark 
Shares (``WEBS'') which are issued by an open-end management investment 
company consisting of seventeen separate series based on seventeen 
foreign equity market indexes.\5\ The investment objective of each 
series is to provide results that correspond to the aggregate price and 
yield performance of publicly traded securities in a particular market 
as represented by a particular foreign equity index.
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    \5\ The initial series offered by this investment company are: 
the Australia Index Series; the Austria Index Series; the Belgium 
Index Series; the Canada Index Series; the France Index Series; the 
Germany Index Series; the Hong Kong Index Series; the Italy Index 
Series; the Japan Index Series; the Malaysia Index Series; the 
Mexico (Free) Index Series; the Netherlands Index Series; the 
Singapore (Free) Index Series; the Spain Index Series; the Sweden 
Index Series; the Switzerland Index Series; and the United Kingdom 
Index Series.
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    The Amex has proposed trading options on exchange-traded trust 
units and fund shares pursuant to the same rules and procedures that 
are generally applicable to trading in options on equity securities 
with only minor differences that affect their clearance and 
settlement.\6\ These differences are that options on trust units and 
fund shares would be listed as European-style options only and that 
each option contract would cover 1000 trust units or fund shares as the 
unit of trading.
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    \6\ Supra note 3.
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    The general rights of a holder of a single call equity option 
contract are set forth in Article VI, Section 9(a) of OCC's by-laws, 
and the general rights of a holder of a single put equity option 
contract are set forth in Article VI, Section 9(b) of OCC's by-laws. 
Because options on trust units or fund shares are deemed equity option 
contracts under OCC's rules, OCC is amending Section 9(a) and (b) of 
Article VI to set forth the general rights of a holder of a single 
European-style equity call option \7\ and a single European-style 
equity put option,\8\ respectively. Furthermore, OCC is amending 
Interpretations and Policy .01 to Section 9, which provides that 
subsections (a) and (b) of Section 9 apply only to stock option 
contracts to clarify that the term ``stock option contracts'' will 
include option contracts on publicly traded interests in trust units, 
fund shares, or shares in entities similar to investment companies that 
hold portfolios or baskets of common stock.
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    \7\ A holder of a single European-style call option contract 
will have the right on and only on the expiration date, expiring at 
the expiration time on such date, to purchase from OCC at the 
aggregate exercise price the number of units of the underlying 
security represented by such option contract.
    \8\ A holder of a single European-style put option contract will 
have the right on and only on the expiration date, expiring at the 
expiration time on such date, to sell to OCC at the aggregate 
exercise price the number of units of the underlying security 
represented by such option contract.
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    OCC is adding Interpretation and Policy .01 to Article VI, Section 
10 of the by-laws to reflect that, for series of options in which the 
underlying security is trust units or fund shares, the unit of trading 
is the amount of the underlying security deliverable upon the exercise 
of the option as specified by the exchange on which the option is 
traded unless otherwise specified by OCC in accordance with its by-laws 
and rules.
    In addition, OCC is adding Rule 807 to its rules. The rule contains 
essentially the same provisions as those found in Interpretations and 
Policy .08 to Article VI, Section 11 of the by-laws.\9\ Rule 807 sets 
forth the general provision that when a flexibly structured option 
contract with a European-style expiration has been adjusted to require 
upon exercise the delivery of a fixed amount of cash, the expiration 
date with respect to the option will be accelerated to fall on or 
shortly after the date on which the conversion of the underlying 
security to a right to receive cash occurs. The ability to accelerate 
an expiration date following an adjustment calling for a fixed amount 
of cash was added specifically to accommodate European-style, flexibly-
structured equity options. Without the ability to accelerate, the 
option position would have to be maintained until it could be exercised 
at its regular expiration. For the same reason, OCC is making this 
applicable to all European-style stock option contracts. In connection 
with the addition of Rule 807, OCC is amending the term ``expiration 
date'' as defined in Article I, Section 1 of OCC's by-laws, to provide 
that the expiration date of a stock option contract is subject to the 
acceleration provisions of the new rule.
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    \9\ Section 11 sets forth the general rules pertaining to 
adjustments on stock option contracts. OCC has deleted Section .08 
from the Interpretations and Policies and moved these provisions to 
new Rule 807.
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II. Discussion

    Section 17A(b)(3)(F) of the Act \10\ requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds in its custody or control or for which it is responsible. The 
Commission believes the rule change is consistent with OCC's obligation 
under the Act because OCC will clear and settle options on trust units 
and fund shares by using existing OCC systems, rules, and procedures. 
Thus, OCC should be able to implement the clearance and settlement of 
options on trust units and fund shares in a safe manner consistent with 
its statutory obligation due to the similarity of options on trust 
units and fund shares to option products currently cleared and settled 
by OCC.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-OCC-97-02) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17717 Filed 7-2-98; 8:45 am]
BILLING CODE 8010-01-M